Selling Your Home

The tax law allows the majority of taxpayers who sell their homes to enjoy 100% tax-free profit from the sale.

The exclusion for home-sale profits

If you have owned an used your home as your principal residence for at least two of the five years proceeding the sale, you may exclude from income tax up to $250,000 of profit if you're single or $500,000 if you're married filing jointly. Generally, the exclusion may be used only once every two years.

The law provides that married individuals may exclude up to $500,000 of profits if:

	Either spouse owned the home for at least two of the five years before the sale,
	Both spouses used the home as a principal residence for at least two of the five years before the sale, and
	Neither spouse is ineligible for the exclusive because of the once-every-two-year limit. If one spouse cannot use the exclusion because of the once-every-two-year rule, the other spouse may still claim the exclusion if he or she qualifies. However, the exclusion then cannot exceed $250,000.

If you can't meet the requirements

The law does not contain some relief for those taxpayers who cannot meet the ownership and use rules or who have not already excluded gain on a home sale within the two-year limit. If the failure to meet either rule is due to a job change, health problems, or certain other unforeseen circumstances, a partial exclusion may be available. The partial exclusion is calculated based on the fraction of the two years that the requirements were made.

Not all homeowners profit

The exclusion rules are good news for most taxpayers. Not only will most home sales not be subject to tax whether there is a replacement home purchased or not, the need for record-keeping may be lessened for many taxpayers. However, homeowners with very large profits locked in their homes could face a tax. Because home prices can appreciate significantly over a period of years, taxpayers cannot be certain that their gain in a future home sale will always be at, or under, the exclusion limit. For this reason, it is advisable to maintain good records of home costs and improvements in order to verify the basis of the home when it is sold. Good records will also be necessary if an audit requires you to document your basis in a home sale.

More About Home Sales

	The definition of "principal residence" includes more than the single family structure. House trailers, mobile homes, houseboats, condominiums, cooperative apartments, duplexes, and even boats that have cooking, sleeping, and bathroom facilities can all qualify if they are used as a principal residence.
	If you use a portion of your home for business or as a rental, the exclusion will not apply to gain attribute to that portion.
	If the gain on a home sale exceeds the $250,000/$500,000 exclusion amounts, t will be taxed as a capital gain. The gain will be treated as long-term gain if you owned your home for more than 12 months.
	In your recordkeeping, be aware that home repairs do not increase your tax basis in a home, but capital improvements do. Typical repairs include such things as painting, cleaning the furnace, refinishing floors, etc. Examples of improvements include substantial landscaping, installing central air conditioning, or remodeling the kitchen or other rooms.
	Home sales in divorce and remarriage situations call for planning in order to maximize tax breaks. The rules allow some flexibility for homeowners who are divorcing or remarrying, though it's advisable to get details on how the rules would apply to any individual situation.
	A taxpayer who qualifies for the home sale exclusion may elect not to use it.
	Information reporting won't be required for sales of homes qualifying for the exclusion if certain conditions are met.
	The law does not provide any relief if you sell your residence at a loss. Losses on the sale of a home are not tax-deductible.
	When you sell your home, you may be able to take a deduction for any still deducted points paid in a refinancing.

While the universal exclusion simplifies the tax consequences on most home sales, homeowners may still have tax concerns relating to their home. If you'd like more information or assistance with tax matters related to buying or selling a home, contact our office. We're here to help.